May 5, 2018

Poor Schumpeter — abused as a testimonial for MMT

Comment on Lars Syll on ‘Schumpeter — an early champion of MMT’

Blog-Reference and Blog-Reference

Lars Syll cites Schumpeter: “The theory to which economists clung so tenaciously makes them out to be savers when they neither save nor intend to do so; it attributes to them an influence on the ‘supply of credit’ which they do not have. The theory of ‘credit creation’ not only recognizes patent facts without obscuring them by artificial constructions; it also brings out the peculiar mechanism of saving and investment that is characteristic of fullfledged capitalist society and the true role of banks in capitalist evolution. With less qualification than has to be added in most cases, this theory therefore constitutes definite advance in analysis.”

Lars Syll, though, fails to cite the sequel: “Nevertheless, it proved extraordinarily difficult for economists to recognize that bank loans and bank investments do create deposits. In fact, throughout the period under survey they refused with practical unanimity to do so. And even in 1930, when the large majority had been converted and accepted that doctrine as a matter of course, Keynes rightly felt it to be necessary to reexpound and to defend the doctrine at length(fn.5), and some of its most important aspects cannot be said to be fully understood even now.”

Fn. 5 says: “There is, however, a sequel to Lord Keynes’s treatment of the subject of credit creation in the Treatise of 1930 of which it is necessary to take notice in passing. The deposit-creating bank loan and its role in the financing of investment without any previous saving up of the sums thus lent have practically disappeared in the analytic schema of the General Theory, where it is again the saving public that holds the scene. Orthodox Keynesianism has in fact reverted to the old view according to which the central facts about the money market are analytically rendered by means of the public’s propensity to save coupled with its liquidity preference. I cannot do more than advert to this fact. Whether this spells progress or retrogression, every economist must decide for himself.”

Keynes’ GT is a clear retrogression. And, as a matter of fact, MMT followed the Keynes of the GT. It should not be too difficult to see this. The MMT balances equations reads (X−M)+(G−T)+(I−S)=0 (i).#1 When simplified to the bare bones, i.e. X, M, G, T, all 0, then we have I=S that is, saving equals investment.

This is the Keynesian Ur-blunder: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

The axiomatically correct balances equation reads (X−M)+(G−T)+(I−S)−(Q−Yd)=0 (ii).#2 Legend: Q macroeconomic monetary profit, Yd distributed profit.

The comparison of (i) and (ii) tells everybody that Keynes dealt with a zero profit economy. Because a zero profit economy is a NONENTITY the whole of the GT is proto-scientific garbage.#3 Keynes, of course, never realized this, and neither did his dull followers up to the present including Lars Syll and the MMTers. What happened as a practical result is that Keynes and MMT ultimately became the profit machine for the one-percenters.#4

To portray Schumpeter as a forerunner of the analytically brain-dead MMT garbage is an insult of the outstanding scientist Schumpeter who, as an exception#5, clearly saw the defects of Keynesian macro and who spotted exactly where macro and monetary theory took the wrong turn.

Egmont Kakarot-Handtke


#1 Down with idiocy!
#2 Profit and the Private-Property-Irrelevance Theorem
#3 Going beyond Wicksell, Keynes, and MMT
#4 Keynes, Lerner, MMT, Trump and exploding profit
#5 Economists: Standing on the Shoulders of Gnomes

Related 'Poor Wicksell — abused as a testimonial for MMT'. For details of the big picture see cross-references MMT.

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REPLY to Calgacus on May 6

You say: “MMTers of course know all this. I used to frequently cite this very note of Schumpeter myself. Part of Minsky’s & MMT’s explicitly stated project in the early days was to combine Keynes’s General Theory with his more ‘creditary’ Treatise on Money. I mean, c’mon ― Minsky was Schumpeter’s student.”

All this biographical gossip is irrelevant. The point is that Keynes, Minsky, and MMTers got macroeconomic profit wrong.

Keynes messed up the basics of macro with this faulty syllogism: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

Minsky built on Keynesian macro but not on I=S: “The simple equation ‘profit equals investment’ is the fundamental relation for a macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure.” (Minsky, 2008, p. 161)#1, #2

So Minsky ended up with Q=I. The axiomatically correct Profit Law reads Q=Yd+I−S+(X−M)+(G−T) (i) for the open economy with distributed profit. This boils down to Q=Yd+I−S (ii) with government G, T and foreign trade X, M set to zero, this, in turn, boils down to the Keynes of the Treatise Q=I−S, this boils down to Minsky’s Q=I on the one hand and to the Keynes of the General Theory I=S on the other.

Schumpeter realized that there was something wrong with profit: “The concept of windfall profits is now mainly in use for aggregate profits that arise (if for this purpose we may use the terminology of Keynes’s Treatise on Money) from a surplus of investment over saving, so that individual profits that are due to chance tend to drop out of the picture. It might be argued that this arrangement misses the essence of the profit phenomenon and falls below the level attained by Marshall.”

In contrast to Schumpeter, MMTers never realized anything and in particular that there must be something wrong with profit in their pivotal balances equation.#3

You claim: “MMTers of course know all this”. Fact is that MMTers know nothing about the foundational magnitude of economics. MMT is scientifically dead, I mean, c’mon ― it is pretty obvious that debt-does-not-matter MMTers are agenda pushers of the one-percenters. After all, the axiomatically correct Profit Law (i) tells everybody that Public Deficit = Private Profit.


#1 Sitcom economics
#2 Heterodoxy, too, is scientific junk
#3 For the full-spectrum refutation see cross-references MMT

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REPLY to Matt Franko on May 8

MMTers ARE agenda pushers of the one-percenters. This is not a hypothesis but a fact.

The somewhat skewed distribution of income and financial wealth is the empirical proof of the validity of the axiomatically correct macroeconomic Profit Law [Q=Yd+I−S+(X−M)+(G−T)] which clearly states that Public Deficit = Private Profit.#1

The main task of MMT is pushing deficit spending and sedating the ninety-nine-percenters with the slogan that public debt does not matter. You cannot take the ‘Marx Was Right After All and Give Every American a Job and a Pony’ rhetoric of the self-styled Progressives Tom Hickey, Bill Mitchell, Stephanie Kelton and the rest of the MMT sales team seriously.

MMT is NOT a scientifically valid theory but soapbox economics.#2


#1 Keynes, Lerner, MMT, Trump and exploding profit
#2 Down with idiocy!